Feel-good habits are hard to break.

 

In the United States – and in California especially – the societal feel-good habit that seems most vexing has nothing to do with the addictions we usually talk about. We never cluck-cluck about the neighbors because they succumb to it, probably because we all dabble in it to some degree. The dependence in question is not chemical, it’s behavioral: we spend more than we earn.

That’s actually a huge problem. It’s not just that we must each, someday, pay the piper. We all know that. And we all count on an anomaly that’s been courting us for more than a decade to save us when the time comes. It can’t.

 

The essential problem is this: to be in a state of equilibrium, our economy requires that investment, the fertilizer that makes the economy grow, be balanced by an equal amount of savings. We haven’t been observing that rule.

There are folks who argue that the “new” economy has a new set of rules, but they’re being shortsighted. The economy has been behaving rationally, we’ve just been substituting asset growth for savings to keep the equation balanced. And the problem with doing that is that assets don’t have fixed values. Pop the bubble, let them shrink to their natural level, and our deflated assets will pull the plug on investment and economic growth for years.

 

What about savings? For a number of years, Americans have been saving at an abysmally low rate, something approximating 1.4 percent. That’s why, as the value dropped out of housing, the asset with the greatest growth history – the biggest bubble – the economy slowed down and settled in with a growth rate around 1 percent, maybe a little less.

 

Don’t take heart, though. In 2007 we broke the bank. Average household debt climbed to about one-third more than average household income. That means that last year, we un-saved. There’s a lag between behavior like that and the behavior of the economy, so it’s likely we’ll see some economic shrinkage in the coming year. The ride’s not over, and the worst stretch of road lies ahead.

We’re not alone in thinking this. Despite President George Bush’s plan to enlist the help of mortgage lenders to keep homeowners in the homes they bought unwisely, and despite former President Bill Clinton’s proposal, unveiled in a speech in Oakland Jan. 16, to make federal aid available to cities so they can bail out homeowners who bought homes they now cannot afford, it seems to some pretty savvy financial people that the answer may be to let the housing market collapse.

 

Stephen Roach, for example, chairman of Morgan Stanley Asia, argues that recent losses in home equity are really just the beginning – homes in many markets in the U.S. are overpriced to the tune of 30 percent or so. That’s a lot of air to let out of the bubble. It’s going to hurt, but it just may be that the only way out is through – take the punishment and move on.

We’ve been living off of asset growth, and paying for it with tremendous trade deficits. China is the current hobgoblin, but in fact there are 39 other countries with which we have trade deficits. That’s how we financed our economy’s growth. But the economy is in a disequilibrated state, and as it struggles to right itself it will take back, in a sense, the asset inflation that’s been feeding it.

 

It’s time to renew the idea of saving from income, instead of spending every last cent we earn and counting on asset inflation to provide for our future. It’s a fickle provider and it cannot be counted on.

And we need to watch over our public treasuries, which have, to some degree, been run on the same principle, in the belief that asset growth would somehow make up for a failure to put aside enough to pay our public obligations. If any proof is needed that faith in asset growth is misplaced, just take a look at Gov. Arnold Schwarzenegger’s proposal to cut the state budget by slicing 10 percent out of every agency’s spending authority. The shortfall happened because of reliance on property tax projections that assumed constant or rising asset value.

 

The problem caught up with the state a bit faster than it will catch up with individuals because of the way the state collects and spends money. But make no mistake, we will all face the same conundrum if we don’t get the monkey off our backs and learn to live within our means, including setting aside some of our income as savings for that inevitable rainy day.

Assets are supposed to grow in value, and in the end we should be able to cash out the long-term gains in the worth of assets we hold. But that’s a different thing altogether from cashing out short-term asset splurges as part of a spend-as-you-go plan, then having to make up for periodic contractions when they deflate those short-term gains.

 

That’ll be 2 cents, please.